STRENGTHS

Discovery of hydrocarbon deposits that could compensate for depleting oil reserves

Presence of the main American naval base in the area (5th Fleet of the US Navy)

Low unemployment rate

WEAKNESSES

Economy and public finances exposed to hydrocarbon price fluctuations

Acute sociopolitical tensions between the ruling Sunni minority and the majority Shia population fuelled by the regional context featuring tension with Iran and the embargo on Qatar

Dependent on foreign labour

Public debt, particularly external debt, is very high

Risk assessment

Slower growth despite robust investment

Despite exploration for offshore oil and gas deposits estimated at 80 billion barrels, oil sector growth – which was negative before 2018 – is expected to remain weak in 2019, and will not be sufficient to prevent a further slowdown in overall growth. However, ongoing international assistance, particularly from the GCC, should enable the government to maintain a significant investment drive. In October 2018, this led to completion of a pipeline to transport oil from Saudi Arabia to Bahrain Petroleum Company refinery, the country’s national oil company. This infrastructure should lead to an increase in Bahrain’s processing capacity. In addition, the favourable tax regime will continue to attract private investment. In 2019, aluminium production is expected to rebound thanks to the launch of a new potline by Aluminium Bahrain. This should boost exports, since aluminium is the second largest export after oil (24% of exports in 2017). Nevertheless, the political and social context could constrain demand.

Household consumption (43% of GDP in 2017) is expected to be hampered by further fiscal austerity measures. Rising inflation, fuelled by the introduction of a GCC-wide VAT, as well as rising house and food prices, is also expected to have a dampening effect.

Difficult to reduce the public balance

As part of its five-year fiscal programme (2018-2022), the government will pursue a policy of fiscal consolidation. The programme includes balancing the accounts of the Electricity and Water Board, reducing current expenditure, introducing a voluntary pension scheme for civil servants, and increasing non-oil revenues. To this end, a 5% VAT will be introduced in January 2019. These efforts will also be undertaken to receive the USD 10 billion in aid over five years promised by Saudi Arabia, Kuwait, and the United Arab Emirates. However, a further reduction in subsidies (18% of expenditure) and in the wage bill (38% of expenditure) – which will have to be introduced if the government intends to achieve its objective of a balanced budget by 2022 – will not be easily accepted in the tense social climate. In addition, public finances depend mainly on the oil sector, which generates 75% of revenues. The rise in oil prices in 2018 thus played a major role in curbing the government deficit. Nonetheless, since the price required for a balanced budget is USD 113 per barrel, the deficit will remain substantial. In order to finance it, the kingdom will continue to rely on debt. The increase in public debt, which is divided between domestic and foreign creditors and which has doubled in the space of four years, coupled with the downgrade in Bahrain’s sovereign rating to speculative grade have pushed up the cost of debt. At the same time, the decline in investor confidence will remain limited due to the intervention of other GCC members to maintain the dinar’s dollar peg and debt sustainability.

A stable current account deficit but the external financial situation remains fragile

In 2018, the current account deficit narrowed considerably, due to the rise in the price of oil, which accounted for more than half of export earnings. In 2019, the trade balance, which has been slightly positive since 2018, is expected to decline slightly, while the services surplus (10% of GDP in 2017), linked to tourism and insurance activity, is set to grow significantly. However, profit repatriation by foreign companies and transfers by foreign workers are expected to put more pressure on the current account deficit. The increase in that deficit following the fall in oil prices in 2014 resulted in a decline in foreign exchange reserves, which stood at only three weeks of imports in September 2018. The expected rise in US policy rates will increase the speculative pressure on the dollar peg. In addition, external debt, which is mainly private (76% of the total), has increased sharply, climbing from 154% in 2014 to 179% in 2017.

Tensions between the predominantly Shia population and the Sunni ruling elite will remain high. The political and social marginalisation felt by the Shia community is at the root of the unrest. The situation is exacerbated by the rivalry between Saudi Arabia, which supports the kingdom, and Iran, which is accused of supporting Shia opposition groups (al-Wefaq and Waad). Legislative and municipal elections held in December 2018 handed victory to independent candidates loyal to the king. In fact, many Shia militants heeded the call from al-Wefaq to boycott the elections, meaning that the opposition will remain weak. The tense social context has had a negative impact on the business environment, which has been quite favourable until now, thanks to efforts to attract foreign investors and develop the private sector.